SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to _______________
Commission File Number 1-475
A.O. SMITH CORPORATION
Delaware 39-0619790
(State of Incorporation) (IRS Employer ID Number)
P. O. Box 245008, Milwaukee, Wisconsin 53224-9508
Telephone: (414) 359-4000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes _X_ No ___
Class A Common Stock Outstanding as of October 29, 1999: 8,691,426 shares
Common Stock Outstanding as of October 29, 1999: 14,702,845 shares
Exhibit Index Page 17
<PAGE>
Index
A. O. Smith Corporation
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Earnings and Retained Earnings
- Three and nine months ended September 30, 1999 and 1998 3
Condensed Consolidated Balance Sheet
- September 30, 1999 and December 31, 1998 4
Condensed Consolidated Statement of Cash Flows
- Nine months ended September 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements
- September 30, 1999 6-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-12
Item 3. Quantitative and Qualitative Disclosure of Market Risk 13
Part II. Other Information
Item 1. Legal Proceedings 14-15
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Index to Exhibits 18
2
<PAGE>
PART I--FINANCIAL INFORMATION
- -----------------------------
ITEM 1--FINANCIAL STATEMENTS
- ----------------------------
<TABLE>
A.O. SMITH CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
AND RETAINED EARNINGS
Three and Nine Months ended September 30, 1999 and 1998
(000 omitted except for per share data)
(unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Electric Motor Technologies $211,609 $135,309 $516,148 $360,913
Water Systems Technologies 75,797 71,685 236,536 220,534
Other 30,901 36,260 85,729 111,442
-------- -------- -------- --------
NET SALES 318,307 243,254 838,413 692,889
Cost of products sold 258,445 196,232 674,292 552,245
-------- -------- -------- --------
Gross profit 59,862 47,022 164,121 140,644
Selling, general and administrative expenses 35,578 26,324 92,544 80,605
Interest expense 4,380 1,974 8,879 5,191
Interest income (512) (258) (1,066) (3,279)
Other expense - net 2,073 927 5,612 2,341
-------- -------- -------- --------
18,343 18,055 58,152 55,786
Provision for income taxes 5,977 6,356 20,469 19,587
-------- -------- -------- --------
Earnings before equity in loss of joint ventures 12,366 11,699 37,683 36,199
Equity in loss of joint ventures - (725) - (2,418)
-------- -------- -------- --------
NET EARNINGS 12,366 10,974 37,683 33,781
RETAINED EARNINGS
- -----------------
Balance at beginning of period 519,693 483,896 499,954 466,514
Cash dividends on common shares (2,786) (2,832) (8,364) (8,257)
-------- -------- -------- --------
BALANCE AT END OF PERIOD $529,273 $492,038 $529,273 $492,038
======== ======== ======== ========
EARNINGS PER COMMON SHARE (note 7)
Basic $0.53 $0.47 $1.63 $1.43
Diluted $0.52 $0.46 $1.59 $1.39
DIVIDENDS PER COMMON SHARE $0.12 $0.12 $0.36 $0.35
See accompanying notes to unaudited condensed consolidated financial statements.
</TABLE>
3
<PAGE>
PART I--FINANCIAL INFORMATION
- -----------------------------
ITEM 1--FINANCIAL STATEMENTS
- ----------------------------
<TABLE>
A.O. SMITH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
September 30, 1999 and December 31, 1998
(000 omitted)
<CAPTION>
(unaudited)
September 30, 1999 December 31, 1998
------------------ -----------------
ASSETS
- ------
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents (note 2) $ 10,079 $ 37,666
Receivables 226,120 133,764
Inventories (note 4) 162,225 99,984
Deferred income taxes 10,310 11,376
Other current assets 8,084 4,599
---------- ---------
TOTAL CURRENT ASSETS 416,818 287,389
Property, plant and equipment 617,258 507,033
Less accumulated depreciation 285,725 258,263
---------- ---------
Net property, plant and equipment 331,533 248,770
Goodwill and other intangible assets 253,384 149,282
Other assets 95,146 81,991
---------- ---------
TOTAL ASSETS $1,096,881 $ 767,432
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
Trade payables $ 102,443 $ 57,429
Accrued payroll and benefits 39,254 31,385
Product warranty 12,792 7,892
Accrued income taxes 5,207 6,786
Long-term debt due within one year 4,629 4,629
Other current liabilities 39,524 24,036
---------- ---------
TOTAL CURRENT LIABILITIES 203,849 132,157
Long-term debt (note 5) 344,354 131,203
Other liabilities 69,803 60,636
Deferred income taxes 50,377 42,343
STOCKHOLDERS' EQUITY:
Class A common stock, $5 par value: authorized
14,000,000 shares; issued 8,723,970 43,620 43,688
Common stock, $1 par value: authorized 60,000,000
shares; issued 23,825,392 23,825 23,812
Capital in excess of par value 52,165 51,121
Retained earnings (note 5) 529,273 499,954
Accumulated other comprehensive income (note 6) (2,272) (1,488)
Treasury stock at cost (218,113) (215,994)
---------- ---------
TOTAL STOCKHOLDERS' EQUITY 428,498 401,093
---------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,096,881 $ 767,432
========== =========
See accompanying notes to unaudited condensed consolidated financial statements
</TABLE>
4
<PAGE>
PART I--FINANCIAL INFORMATION
- -----------------------------
ITEM 1--FINANCIAL STATEMENTS
- ----------------------------
<TABLE>
A.O. SMITH CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months Ended September 30, 1999 and 1998
(000 omitted)
(unaudited)
<CAPTION>
Nine Months Ended
September 30
------------
1999 1998
---- ----
OPERATING ACTIVITIES
CONTINUING
- ----------
<S> <C> <C>
Net earnings $ 37,683 $ 33,781
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization 30,014 22,552
Equity in loss of joint ventures - 2,418
Net change in current assets and liabilities (5,682) (6,963)
Net change in noncurrent assets and liabilities (11,250) 2,751
Other - net (255) (99)
----------- ---------
CASH PROVIDED BY OPERATING ACTIVITIES 50,510 54,440
INVESTING ACTIVITIES
Capital expenditures (26,595) (20,116)
Capitalized purchased software costs (1,187) (1,308)
Investment in joint ventures - (8,066)
Acquisition of business (note 3) (251,892) (126,456)
----------- ---------
CASH USED BY INVESTING ACTIVITIES (279,674) (155,946)
----------- ---------
CASH USED BY CONTINUING OPERATIONS
BEFORE FINANCING ACTIVITIES (229,164) (101,506)
DISCONTINUED
- ------------
Cash used by discontinued operations
before financing activities (1,761) (2,095)
FINANCING ACTIVITIES
Long-term debt incurred 217,780 30,590
Long-term debt retired (4,629) (5,590)
Purchase of common stock held in treasury (2,745) (33,244)
Other stock transactions 1,296 397
Dividends paid (8,364) (8,257)
----------- ---------
CASH PROVIDED BY / (USED IN) BY FINANCING ACTIVITIES 203,338 (16,104)
----------- ---------
Net decrease in cash and cash equivalents (27,587) (119,705)
Cash and cash equivalents-beginning of period (note 2) 37,666 145,896
----------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 10,079 $ 26,191
=========== =========
See accompanying notes to unaudited condensed consolidated financial statements.
</TABLE>
5
<PAGE>
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1 - FINANCIAL STATEMENTS
- -----------------------------
A. O. SMITH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(unaudited)
1. Basis of Presentation
The consolidated financial statements presented herein are based on interim
figures and are subject to audit. In the opinion of management, all
adjustments consisting of normal accruals considered necessary for a fair
presentation of the results of operations and of financial position have
been made. The results of operations for the three and nine-month periods
ended September 30, 1999 are not necessarily indicative of the results
expected for the full year. The consolidated balance sheet as of December
31, 1998 is derived from the audited financial statements but does not
include all disclosures required by generally accepted accounting
principles. Certain prior year amounts have been reclassified to conform to
the 1999 presentation.
2. Statement of Cash Flows
For purposes of the Consolidated Statement of Cash Flows, cash and cash
equivalents include short-term investments held primarily for cash
management purposes. These investments normally mature within three months
from the date of acquisition.
3. Acquisition
On August 2, 1999, the Company acquired the assets of the motors business
of MagneTek, Inc. for $253 million, subject to final adjustment. The
company funded the acquisition through available cash ($42 million),
proceeds from the issuance of commercial paper ($103 million) and
borrowings under a revolving credit facility and available lines of credit
($108 million). The acquisition was accounted for by the Company using the
purchase method of accounting and, accordingly, the financial statements
include the operating results of the acquired business from the date of its
acquisition.
The pro forma unaudited results of operations for the nine-month periods
ended September 30, 1999 and September 30, 1998, assuming consummation of
the purchase as of January 1, 1998, are as follows:
6
<PAGE>
Dollars in Thousands: Nine Months Ended September 30
except per share amounts 1999 1998
---- ----
Net sales 1,074,640 986,939
Earnings 29,873 38,154
Earnings per share:
Basic 1.29 1.61
Diluted 1.26 1.57
4. Inventories (000 omitted)
Sept. 30, 1999 Dec. 31, 1998
-------------- -------------
Finished products $ 95,191 $ 58,534
Work in process 40,018 18,354
Raw materials 53,156 50,542
Supplies 2,226 1,350
---------- ---------
190,591 128,780
Allowance to state inventories
at LIFO cost 28,366 28,796
---------- ---------
$ 162,225 $ 99,984
========== =========
5. Long-Term Debt
To support the acquisition of the assets of MagneTek, Inc.'s motor
business, the company entered into a $350 million multi-year credit
facility on August 2, 1999, with nine different banks. The facility is made
up of two tranches: $100 million which expires July 28, 2000, and $250
million which expires August 2, 2004. The previous $100 million facility
expiring on June 30, 2001 was terminated on August 2, 1999.
The company's long-term credit agreements contain certain conditions and
provisions, which restrict the company's payment of dividends. Under the
most restrictive of these provisions, retained earnings of $59.7 million
were unrestricted as of September 30, 1999 for cash dividends and treasury
stock purchases.
6. Comprehensive Earnings (Loss)
The company's comprehensive earnings were $12.6 million and $36.9 million
for the three- and nine-month periods ended September 30, 1999 and $11.4
million and $33.8 million for the three and nine-month periods ended
September 30, 1998. Comprehensive earnings, for all periods presented, were
comprised of net earnings and foreign currency translation adjustments. No
provisions or benefits for U.S. income taxes have been made on these
foreign currency translation adjustments.
7. Earnings per Share of Common Stock
The numerator for the calculation of basic and diluted earnings per share
is net earnings. The following table sets forth the computation of basic
and diluted weighted-average shares used in the earnings per share
calculations:
7
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Denominator for basic earnings
per share
- weighted-average shares 23,189,535 23,390,234 23,188,520 23,690,464
Effect of dilutive stock options 655,900 567,290 582,825 625,668
---------- ---------- ---------- ----------
Denominator for diluted earnings
per share 23,845,435 23,957,524 23,771,345 24,316,132
========== ========== ========== ==========
<CAPTION>
8. Operations by Segment
(000 omitted) Three Months Ended Nine Months Ended
September 30 September 30
--------------------------- ---------------------------
1999 1998 1999 1998
------------ ------------- ------------ -----------
Net Sales
<S> <C> <C> <C> <C>
Electric Motor Technologies $211,609 $135,309 $516,148 $360,913
Water Systems Technologies 75,797 71,685 236,536 220,534
Other 30,901 36,260 85,729 111,442
-------- -------- -------- --------
Net Sales $318,307 $243,254 $838,413 $692,889
======== ======== ======= ========
Earnings before Interest and Taxes
Electric Motor Technologies $ 20,041 $ 14,931 $ 59,076 $ 41,285
Water Systems Technologies 7,169 7,775 24,067 22,277
Other 933 1,536 1,124 7,293
-------- -------- --------- --------
Total Segments 28,143 24,242 84,267 70,855
General Corporate and Research
and Development Expenses (5,932) (5,671) (18,302) (17,154)
Interest Expense - Net (3,868) (1,716) (7,813) (1,912)
-------- -------- --------- --------
Earnings before Income Taxes 18,343 16,855 58,152 51,789
Provision for Income Taxes (5,977) (5,881) (20,469) (18,008)
-------- -------- --------- --------
Net Earnings $ 12,366 $ 10,974 $ 37,683 $ 33,781
======== ======== ======== ========
</TABLE>
Intersegment sales, which are immaterial, have been excluded from segment
revenues.
The assets of the Electric Motor Technologies segment increased by more
than $315 million at September 30, 1999 compared with the amount reported
in the December 31, 1998 annual report. This increase was due to the
aforementioned MagneTek motor business acquisition on August 2, 1999 (see
note 3).
8
<PAGE>
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- -----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
RESULTS OF OPERATIONS
- ---------------------
FIRST NINE MONTHS OF 1999 COMPARED WITH 1998
- --------------------------------------------
Sales increased 31% to $318.3 million in the third quarter of 1999 compared with
1998 third quarter sales of $243.3 million. Significantly higher sales at
Electric Motor Technologies benefiting from the recent acquisition of the
MagneTek motor business, and a 6% increase at Water Systems Technologies more
than offset a 15% decline in sales in the Storage & Fluid Handling Technologies
segment. Sales for the first nine months of 1999 were $838.4 million or 21%
higher than the $692.9 million of sales generated during the same period last
year. Of the $145.5 million increase in sales, acquisitions contributed
approximately $132.0 million, while the inclusion of the sales of the company's
wholly-owned Chinese entities accounted for $9 million. In 1998, the company's
Chinese operations were reported as equity in income and were not consolidated.
Third quarter net earnings increased 12.7% to $12.4 million compared with $11
million earned in the third quarter of 1998. Significantly higher operating
profit at Electric Motors more than offset the decline in operating profit at
Storage & Fluid Handling. Net earnings for the first nine months of 1999 were
$37.7 million compared with $33.8 million for the first nine months of 1998.
Third quarter diluted earnings per share increased from $0.46 in 1998 to $0.52
in 1999. Diluted earnings per share for the first nine months of 1999 were $1.59
compared with $1.39 in the same period last year.
The third quarter gross profit margin declined to 18.8% from 19.3% in the third
quarter of 1998 as a result of the decline in profitability in the Storage &
Fluid Handling business, and the inclusion of the MagneTek motor business, which
carries a lower gross margin relative to the consolidated gross profit margin of
the company's other businesses. The gross profit margin for the first nine
months declined to 19.6% in 1999 from 20.3% in 1998 consistent with acquisition
activity and decreased profitability at Storage & Fluid Handling.
Third quarter sales of $211.6 million for the Electric Motors Technologies
platform were more than 56% higher than sales in the third quarter of 1998 and
included approximately $66 million of sales associated with the aforementioned
acquisition of the MagneTek motor business. The balance of the increase in sales
was due to higher demand in the heating, ventilating, and air conditioning
market, increased export motor volume, and higher sales in the company's general
industries business. Year-to-date sales for the electric motor segment were
$516.1 million in 1999 compared with $360.9 million in 1998. The 43% increase in
sales for the first nine months of 1999 reflects the additional sales from the
company's MagneTek motor business acquisition; the acquisition of the General
Electric compressor motor business in July 1998; and the growth in the base
business excluding acquisitions.
9
<PAGE>
Operating profit for the Electric Motor Technologies segment improved
significantly in both the third quarter and first nine months of 1999 compared
with 1998 as a result of the increased volume.
Third quarter sales of Water Systems Technologies were $75.8 million or 5.7%
higher than 1998's third quarter sales of $71.7 million, due primarily to the
inclusion of sales for the Chinese operation. Volumes in both the domestic
residential and commercial markets were flat compared with the year ago quarter.
Sales for the first nine months of 1999 were $236.5 million, compared with
$220.5 million for the first nine months of 1998. Water Systems Technologies'
third quarter operating profits declined from $7.8 million in 1998 to $7.2
million in 1999 reflecting the impact of sluggish domestic markets and continued
investment to support the growing Chinese water products business. Through the
first nine months of 1999, operating profits were $24.1 million or $1.8 million
higher than the same period last year as a result of increased volume in the
first half of 1999.
Third quarter and nine-month sales in the Storage and Fluid Handling segment
declined 14.8% and 23.1%, respectively, compared with the same periods in 1998.
The steepest decline occurred in the fiberglass pipe operation, as sales to both
petroleum marketing and chemical markets were significantly lower throughout
1999 compared with 1998. The decline in the petroleum marketing segment was due
mostly to the expiration of certain EPA regulations whereas chemical-related
markets continue to suffer from weak capital spending. Reduced capital spending
in the chemical and food processing business adversely affected demand for the
segment's storage tank products.
As a result of the lower volume, third quarter operating profits of the Storage
and Fiberglass Products segment declined from $1.5 million in 1998 to $0.9
million in 1999. On a year-to-date basis, profits dropped from $7.3 million in
1998 to $1.1 million in 1999.
Third quarter selling, general and administrative (SG&A) expenses increased $9.3
million compared with the same quarter in 1998. As a percentage of sales, SG&A
increased to 11.2% compared with 10.8% in the third quarter of 1998. These
increases resulted from the MagneTek motor business acquisition and the
inclusion of the Chinese entities, which were not consolidated in 1998. Through
the first nine months of 1999, SG&A was 11.0% of sales compared with 11.6% in
1998. The year-to-date decline in SG&A relative to sales reflects the impact of
the operating expense leverage resulting from the acquisition of the General
Electric compressor motor business at mid year 1998.
Net interest expense for the third quarter and first nine months of 1999
exceeded that of the comparable periods by $2.2 million and $5.9 million,
respectively. The increased financing cost was associated with the acquisition
of the General Electric compressor motor business in July 1998, and the
acquisition of the MagneTek motor business in August 1999.
10
<PAGE>
Other expense for the third quarter and first nine months of 1999 doubled
compared with the same periods in 1998 primarily as a result of higher goodwill
amortization costs related to the previously discussed acquisitions.
The effective tax rate for the third quarter of 1999 was 32.6% compared with
35.2% in the third quarter of 1998. 1999 benefited from recognition of tax
credits associated with the resolution of the company's Research and Development
tax credit claim. The company's effective tax rate for the first nine months of
1999 and 1998 was approximately 35%.
During the first nine months of 1999 and 1998, the company was party to futures
contracts for the purposes of hedging a portion of certain raw material
purchases. The company was also a party to forward exchange contracts to hedge
foreign currency transactions consistent with its committed exposures. Had these
contracts not been in place, the earnings of the company would not have been
materially affected.
Liquidity & Capital Resources
- -----------------------------
The company's working capital was $213.0 million at September 30, 1999 compared
with $155.2 million at December 31, 1998, an increase of $57.8 million. The
majority of the increase in working capital was a result of the MagneTek motor
business acquisition. Cash flow from operations for the year to date period
ended September 30, 1999, excluding acquisitions, declined to $22.7 million
compared with $25.0 million for the same period last year, as a result of higher
capital spending.
Capital expenditures during the first nine months of 1999 were $26.6 million
compared with $20.1 million through September 30, 1998. The majority of the
capital spending increase was related to higher spending requirements in the
motor business. The company projects total capital spending in 1999 to be higher
than 1998, but expects such capital expenditures to be covered by cash flow from
operations.
The company's long-term debt increased $213.2 million in the first nine months
of 1999. The increase was a result of the aforementioned acquisition of the
MagneTek motor business on August 2, 1999. Additionally, the company's leverage
as measured by the ratio of total debt to total capitalization was 45% compared
with 25% at December 31, 1998.
Under the company's odd lot repurchase program initiated in July 1999, the
company purchased 1,914 shares of its common stock during the third quarter.
At its October 13, 1999 meeting, A. O. Smith's Board of Directors declared a
regular quarterly cash dividend of $.12 per share on its common stock (Classes A
and Common). The dividend is payable on November 15, 1999 to shareholders of
record on October 29, 1999.
11
<PAGE>
Year 2000
- ---------
The company has organized its activities to prepare for the Year 2000 (Y2K)
under a company-wide project that involves four phases: assessment,
modification, testing, and implementation.
The Y2K readiness project is a company-wide effort and is monitored centrally.
Each business segment has a core of full-time individuals who have been assigned
specific Y2K responsibilities in addition to their regular assignments.
The assessment and modification phases are complete. Key customers, vendors and
service providers have been queried about their Y2K readiness, and their
responses have been analyzed. All critical suppliers have responded that they
are Y2K compliant.
The testing and implementation phases for renovated Information Technology (IT)
systems are nearing completion. All critical IT systems that were previously
determined to have potential Y2K-related problems have been replaced by
Y2K-certified systems or renovated and tested for Y2K readiness. Completion and
testing of remaining non-critical modules of renovated systems will be completed
during the remainder of the year.
Costs specifically associated with renovating software for Y2K readiness are
funded through operating cash flow and expensed as incurred. Y2K-related costs
have not had a material effect on the company's financial position or results of
operations. The company expects to incur total costs of approximately $2.0
million on the Y2K problem of which the remaining costs are approximately $125
thousand.
To prepare for unforeseen Y2K problems, each business segment has developed
formal contingency plans which include ensuring availability of in-house support
and technical personnel during the transition to the new year, establishing
earlier reporting deadlines, and completing certain critical processes before
year-end.
Following the company's recent acquisition of the worldwide motor operations of
MagneTek, Inc. MagneTek has continued to provide data processing services for
those operations. MagneTek has completed the review and testing of its IT
systems to eliminate Y2K problems and final implementation is substantially
complete.
The company believes that all critical IT and non-IT systems and processes will
be Y2K compliant and allow the company to continue operations in the Year 2000
and beyond with no material impact on its financial position or results of
operations. Unanticipated problems including, but not limited to, critical
suppliers and business partners not meeting their commitments to be Y2K ready,
and the loss of critical skilled personnel, could result in an undetermined
financial risk.
12
<PAGE>
ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
- ----------------------------------------------------------------
As is more fully described in the company's annual report on Form 10-K for the
year ended December 31, 1998, the company is exposed to various types of market
risks, primarily currency and certain commodities. The company monitors its
risks in such areas on a continuous basis, and generally enters into futures
contracts to minimize such exposures for periods of less than one year. The
company does not engage in speculation in its derivatives strategies. There have
been no material changes in the company's futures contracts since December 31,
1998.
Forward Looking Statements
Certain statements in this report are "forward-looking statements". These
forward-looking statements can generally be identified as such because the
context of the statement will include words such as the company "believes",
"anticipates", "expects", "projects" or words of similar import. Although the
company believes that its expectations are based upon reasonable assumptions
within the bounds of its knowledge of its business, there can be no assurance
that its financial goals will be realized. Although a significant portion of the
company's sales are derived from the replacement of previously installed
product, and such sales are therefore less volatile, numerous factors may affect
actual results and cause results to differ materially from those expressed in
forward-looking statements made by or on behalf of the company. Among such
numerous factors, the company includes the continued growth of the world-wide
air conditioning, heating, and refrigeration market; the weather and its impact
on the HVAC, pool and spa pump markets; and the timely and proper implementation
of future cost reduction programs. All subsequent written and oral
forward-looking statements attributable to the company, or persons acting on its
behalf, are expressly qualified in their entirety by these cautionary
statements.
13
<PAGE>
PART II - OTHER INFORMATION
- ---------------------------
ITEM 1 - LEGAL PROCEEDINGS
- --------------------------
Dip Tube Litigation
- -------------------
The Company previously reported on the Dip Tube Litigation in its Form 10-Q
Report for the Quarter ended March 31, 1999. Subsequent to the close of the
third quarter the company entered into a settlement of a lawsuit which is
pending in the United States District Court, Western District of Missouri. The
lawsuit was brought by individuals on behalf of themselves and all persons
throughout the United States who have owned or currently own a water heater
manufactured by Rheem Manufacturing Company, A. O. Smith Corporation, Bradford
White Company, American Water Heater Company, Lochinvar Corporation and State
Industries, Inc. (the "Water Heater Manufacturers") that contain a dip tube
manufactured, designed, supplied or sold by Perfection Corporation between
August, 1993 and October, 1996.
The class claims in the lawsuit are broad and comprehensive and include by way
of example claims for breach or violation of federal, state, common or other
laws; breach of any duties imposed by contract or otherwise; claims based on
strict product liability, negligence, breach of express or implied warranty,
fraud, conspiracy, suppression, consumer fraud, unfair or deceptive trade
practices, negligent or intentional misrepresentation or the Magnuson-Moss Act,
etc. The plaintiffs and defendants have reached a settlement of the claims of
this litigation. On October 21, 1999 the parties petitioned the court to enter
an order determining that the suit may be maintained as a class action and that
the class be constituted as set forth in the complaint. The petition also asks
for preliminary approval of the proposed settlement and approval of the form and
manner of notice which will be given to the class members. The court has also
been asked to set a date for a hearing on the fairness of the settlement and
final approval of the settlement. To date, the court has not acted upon the
petition of the parties.
The settlement agreement anticipates a procedure whereby members of the class
will be able to file claims for reimbursement of damages previously incurred for
the repair or replacement of a subject dip tube and for those class members who
have not incurred out-of-pocket expense or whose subject dip tube related
problems have not been fully remedied, the settlement provides a procedure for
the repair and replacement of the subject dip tubes at no expense to the class
member. The expenses of the reimbursements, repairs and replacements and
administration of the settlement will be paid by the defendant Water Heater
Manufacturers. The settlement agreement contemplates an application to the court
for an award of reasonable attorney's fees and reimbursement of litigation
expenses incurred on behalf of class members by counsel for the class in the
amount of $5,650,000. The court approved award would also be paid by the
defendant Water Heater Manufacturers. In consideration of the agreement by the
Water Heater Manufacturers to effectuate the terms of the settlement agreement
for the benefit of the class members, the class members will release and
discharge the Water Heater Manufacturers from any liability for settled claims.
Further, all such claims of the class against Perfection Corporation, the
manufacturer of the subject dip
14
<PAGE>
tubes, will be deemed assigned to the Water Heater Manufacturers. Individuals
can elect to be excluded from the class and separately pursue their remedies and
if so elected would not be entitled to the benefits of the settlement agreement.
The parties are requesting the court to stay all other legal actions brought or
to be brought against the Water Heater Manufacturers until this lawsuit is
resolved.
Separately, the Water Heater Manufacturers on September 29, 1999 filed a direct
action lawsuit in the Civil District Court for the Parish of Orleans, State of
Louisiana against the insurers of Perfection Corporation and American Meter
Company, the parent company of Perfection. This lawsuit seeks coverage from the
defendant insurance companies for (i) the damages that the Water Heater
Manufacturers and the class members in the federal court action referred to
above have incurred because of the property damages caused by the dip tube
failures, (ii) the liability of the Water Heater Manufacturers assumed by
Perfection by contract, and (iii) the personal injuries suffered by the Water
Heater Manufacturers as a result of the disparagement of them and their products
in the media reports relating to the dip tubes.
As of this date, it is premature for the company to determine what, if any,
costs it will incur with respect to the aforementioned settlement. It is the
Company's expectation that all or a substantial portion of the costs will be
recovered from the insurers of Perfection Corporation and American Meter Company
as well as the Company's insurers. The costs which the Company has incurred to
date in defending the litigation and resolving customer claims have not been
material.
There have been no material changes in the environmental matters previously
reported in Part 1, Item 3 and Note 12 of the Notes to Consolidated Financial
Statements in the company's annual report on Form 10-K for the year ended
December 1998 and Part 2, Item 1 in the quarterly report on Form 10-Q for the
quarter ended June 30, 1999 which are incorporated herein by reference.
15
<PAGE>
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits
(27) Financial Data Schedule
(b) Reports on Form 8-K
A current report on Form 8-K was voluntarily filed by the company on August
17, 1999. The Form 8-K stated that on August 2, 1999 the company acquired
the assets of the motors business of the Motors and Controls Division of
MagneTek, Inc. An amendment to the Form 8-K was filed on October 18, 1999.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
A. O. SMITH CORPORATION
November 12, 1999 /s/John J. Kita
---------------
John J. Kita
Vice President,
Treasurer and Controller
November 12, 1999 /s/G. R. Bomberger
------------------
G. R. Bomberger
Executive Vice President
and Chief Financial Officer
17
<PAGE>
INDEX TO EXHIBITS
-----------------
Exhibit
Number Description
- ------ -----------
(27) Financial Data Schedule
18
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 10,079
<SECURITIES> 0
<RECEIVABLES> 226,120
<ALLOWANCES> 0
<INVENTORY> 162,225
<CURRENT-ASSETS> 416,818
<PP&E> 617,258
<DEPRECIATION> 285,725
<TOTAL-ASSETS> 1,096,881
<CURRENT-LIABILITIES> 203,849
<BONDS> 344,354
0
0
<COMMON> 67,445
<OTHER-SE> 361,053
<TOTAL-LIABILITY-AND-EQUITY> 1,096,881
<SALES> 838,413
<TOTAL-REVENUES> 838,413
<CGS> 674,292
<TOTAL-COSTS> 674,292
<OTHER-EXPENSES> 97,090
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,879
<INCOME-PRETAX> 58,152
<INCOME-TAX> 20,469
<INCOME-CONTINUING> 37,683
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 37,683
<EPS-BASIC> 1.63
<EPS-DILUTED> 1.59
</TABLE>
